The euro has started to lose ground against the dollar after several weeks of steady gains. The EUR/USD pair dropped to the 1.1600 area, hitting weekly lows as demand for the dollar increased as a safe-haven asset.
The main trigger is the escalation of tensions around Iran and growing concerns about potential disruptions to oil supplies through the Strait of Hormuz. Investors are shifting heavily into the US dollar and US Treasuries, putting additional pressure on the euro.
The market is starting to question the ECB’s potential
Despite ongoing expectations of a rate hike by the ECB this summer, the market is no longer confident that the European regulator can maintain a tight policy for long. The reason is weak economic growth in the eurozone and Europe’s high dependence on expensive energy resources. In its latest Financial Stability Review, the ECB also warned about risks of overvalued markets and Europe’s vulnerability to geopolitical shocks.
The dollar gains support from the Fed and geopolitics
Additional pressure on the euro comes from a reassessment of Federal Reserve expectations. Following strong US macroeconomic data, the market is once again pricing in higher rates for longer in the US. This widens the yield differential between the dollar and the euro, supporting the US currency. Analysts at ING warn that if the conflict around Iran persists, EUR/USD could quickly fall below 1.15.
Near-term outlook
At the moment, the market is shifting into a more cautious stance on the euro. As long as geopolitical tensions and high oil prices persist, the upside potential for EUR/USD appears limited. Key events in the coming days include US inflation data, Fed commentary, and the June ECB meeting — these will determine whether the current decline is merely a correction or the start of a broader trend reversal.
From current levels, a rebound toward 1.1650–1.1660 remains possible, where selling pressure may re-emerge. A break below support could trigger a move toward 1.1550. However, as previously noted in EUR/USD retests 1.1650 as ECB rate hike expectations support pair, the pair may continue trading within a range in the near term.
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